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FINRA Fines Self-Directed Trading Firms $2.6M For Poor Oversight

SoFi Securities, SogoTrade, M1 Finance and Open to the Public Investing will pay more than $1 million in restitution after clients were promised fees from lending securities they allegedly never received.

Four firms, including SoFi Securities, SogoTrade, M1 Finance and Open to the Public Investing, will collectively pay $2.6 million for poorly supervising whether it was appropriate to enroll retail customers in fully paid securities lending programs.

The companies all offer commission-free, self-directed trading to retail investors through mobile apps and platforms. The allegations were the result of a FINRA examination of firms offering this program to clients.

The orders against the broker/dealers largely mirror each other. In the case of SoFi, it participated in a fully paid securities lending program offered by its clearing firm since January 2019.

In such a program, a clearing firm borrows a customer’s fully paid or excess margin securities and lends them to a third party in exchange for a daily fee. If a customer is enrolled in the program, the clearing firm will determine which securities to borrow and when. 

Once the clearing firm settles on a security in an enrolled client’s account, it removes it and replaces it with collateral (cash or cash equivalents) in a bank account managed by a trustee with the enrolled client as a beneficiary, according to FINRA. Notably, clearing firms must obtain customer consent before engaging in these kinds of practices.

FINRA claimed SoFi Financial’s agreement with its clearing firm required that SoFi determine which clients could participate in the FPLP, and also determine what compensation customers would be paid if the clearing firm borrowed their fully paid margin securities. 

When customers opened an account, SoFi provided a Master Securities Lending Agreement, which specified the clearing firm has the right to borrow the client’s fully paid and excess margin securities, as well as disclosure documents spelling out the features and risk of the FPLP. Until March 2023, SoFi required all its retail clients consent to MSLA; those clients could later opt-out if they wanted.

But SoFi didn’t have an adequate supervisory system for the task, according to FINRA.

“Although SoFi agreed to determine which of its customers could participate in the FPLP, the firm did not take reasonable steps to make appropriateness determinations prior to enrolling customers in the FPLP,” the order read. “Instead, all new customers were enrolled in the FPLP at account opening.” 

This meant more than 2 million SoFi customers were enrolled during a period of four years, with SoFi pocketing more than $8 million in revenue from its clearing firm lending clients’ shares (the money was SoFi’s share of the borrowing fees, according to FINRA). 

But none of that revenue made it to SoFi’s clients, according to FINRA. In fact, SoFi’s disclosure document stated clients would “receive a loan fee” representing a percentage of the money the clearing firm got when lending the clients’ fully paid margin securities. 

But this wasn’t true, according to FINRA; neither the clearing firm nor SoFi paid customers anything for lending their shares during that time. According to the order, SoFi clients have been receiving a portion of these borrowing fees since March 2023, and the firm has updated its supervisory procedures on the practice.

Each firm received a censure and a fine, with M1 Financial, SoFi Securities and Open to the Public Investing being levied $500,000 each and SogoTrade forced to pay $100,000.

In settling the charges, the firms didn’t admit to FINRA’s allegations, but collectively will pay more than $1 million in restitution to harmed investors, with M1 Finance paying $736,917.86, Open to the Public Investing paying $28,123, SoFi Securities paying $198,282.39 and SogoTrade paying $104,767.25.

A spokesperson for SogoTrade said the firm was "glad to cooperate" with FINRA, and was happy to have the matter resolved.

SogoTrade has already enhanced its compliance with respect to this program," they said. "We look forward to continuing to provide valuable services to our customers across the world."

Representatives from M1 Finance, Open to the Public Investing and SoFi Securities did not respond to requests for comment prior to publication.

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